The Fallacy of OPM – Other People’s Money

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Can a phrase influence a person or even an entire society into destructive behavior?

The analysis of debt woes is often presented as if it’s a math problem, as though people got too far in debt merely as a result of spending too much money over an extended period of time, and all that’s needed to correct the situation and set it right is to reverse the dynamic.

Mechanically that may be true, but in order to get to that point there first needs to be an epiphany of the mind that moves debt away from the status of a useful tool and back to that of a necessary evil undertaken only under very limited circumstances and always with due caution. Debt is less a friend and more an enabler than anything else.

The lack of any such inhibition has had a significant impact on the debt situations of too many people.

The power of a single phrase

It’s often argued that bankruptcy and foreclosure have become common because they no longer carry the stigma they once did. But can’t we say with at least equal justification that part of the reason bankruptcy and foreclosure are so easily accepted today is because credit was first accepted just as easily? After all, before you can have a debt problem you first have to have debt. How did that happen?

By social acceptance.

Now there are a multitude of ways a person justifies adding more debt to his life and during the years leading up to the credit crisis some of the more common ones were “it’s the American way”, “everybody’s doing it”, “that’s the way (zero down) people buy houses today”, and some even pulled out an adaptation from a treasured children’s movie jingle: “I owe, I owe, so off to work I go”.

I don’t know about anyone else, but I never found the bumper stickers with that last one to be of any comfort. If anything it conveyed…resignation. If that’s how you see your life, you’re pretty much licked!

But the one that I think may have been the most destructive was OPM—other people’s money.

Making a wealth building strategy out of a bad habit

The power of a term like OPM is in the fact that that it converts debt into an opportunity to make money. Most people will at least give pause in using credit to pay for luxuries they can’t otherwise afford, but when there’s an investment angle—a chance to use money to make money—not only do inhibitions drop, but it can make borrowing money seem like an economic benefit, maybe even a wise choice.

No doubt that in the right hands, borrowed money has a multiplier affect. Unfortunately, most people have their hands full making money using their own money, let alone someone else’s.

A person who makes money using OPM is most likely a professional at what ever he or she does, has a proven track record of success and at least some ability to mitigate downside risk. Even at that, if we’re completely honest, “Lady Luck” probably plays heavily in the success stories.

I’d be willing to venture a guess that the number and consistency of successful ventures using OPM even by professionals are most likely exaggerated which at least in part explains why people lose money in business deals and companies are forced to close their doors. Both rewards and risks are magnified when leverage is applied to the mix.

Converting desires into investments

In my early adult life I had a friend and mentor who often told me, “it’s not the truth, but what people believe that matters”. If we hear something spoken enough times we begin to believe it and often it becomes part of the body of conventional wisdom—those ideas we accept to be true without much thought or question.

If we believe that obtaining and using other people’s money is critical to our financial success, getting too far into debt is an easy process. All we need to do is to convert our desires into “investments” and borrowing to obtain them become logical and even necessary.

For example:

  • If a $200,000 house is a good investment, a $300,000 house will be an even better one. “It’ll be tight, but in the long run, it’ll be worth it.”
  • ”I need a Mercedes for my career; it’s important to my image and it’s my image that makes money for me”.
  • Joining a pricey, upscale country club under the guise of getting close to the “right people”.
  • Borrowing an amount of money comparable in size to a home mortgage in order to put your child through college at a school you can’t remotely afford.
  • Buying high end clothing in compliance with another favorite, the “dress-for-success” doctrine.
  • Paying for expensive toys, gadgets, camps, and activities for kids as an “investment” in their self esteem.
  • Adding a built-in swimming pool in the backyard because it will raise the value of the house (in many neighborhoods it actually does the opposite).
  • Buying investment real estate with a minimum down payment, even though you have no experience managing rental properties (OK, you might have help here since TV infomercials make this sound SO easy!).

Do you see the seeds of the many personal debt problems in any of that thinking? Every one of these—and a bunch more—can be justified with the notion that we’re borrowing to pay for something that can be framed as an investment.

And this is only a small sampling of the ways the acceptance of a term like OPM tempts us to take on more debt than we can reasonably handle. I’m not saying that there may not be some investment value in some of these for some people under certain circumstances, but in recent decades they’ve largely become a blanket justification with little basis in reality. Even if there is an investment value, borrowing heavily to pay for them also raises the risk and that’s the part that gets dicey when the numbers get too big.

It’s not an exaggeration to suggest that OPM becomes the financial manifestation of another popular fallacy,

“You’ve gotta fake it til you can make it!”

If we’re borrowing because we don’t have the money to pay for what we want, aren’t we really just…faking???

Spending money is spending money—it’s almost never a true investment. And other people’s money is OTHER people’s money. A saying—or the rejection of it—can make all the difference.

Have you ever used the investment label to justify going into debt to pay for something you couldn’t otherwise afford? Do you know others who have? How much impact do you think OPM has had on the credit meltdown?

Kevin At Out of Your RutThis post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.

(Photo credit: alternatePhotography)

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{ 19 comments… read them below or add one }

TheMadTurtle 2010/07/27 at 7:52 am

Interesting post. In my experiences, when it comes to investing money into your home (or should I say “spending money on your home”?) it feels exponentially better when you actually save up the hard-earned cash for that patio, or finished basement, or whatever you’d like to do before you actually spend the money. I find I enjoy it so much more knowing that it’s 100% paid for. It’s similar to that feeling of doing it yourself. When you finish the basement yourself, it takes longer and often saves you money, but when you’re done, you can look back and say “I did that”! And that feels great! If you’re not the sort of person to do the work yourself, that’s perfectly acceptable, but you can have a remarkably similar feeling if you save up all the money you need first and then pay to get it done. Instead of “I did that!” it’s “This is all paid for!”

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Kevin@OutOfYourRut 2010/07/28 at 5:13 am

TheMadTurtle – That’s so true. Maybe you’ve also explained why it often seems that nothing is special anymore–everything seems so common these days that the sense of uniqueness is rare. Borrowing money to pay for everything cheapens the value perhaps because there’s no element of sacrifice in acquiring it.

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Jenna 2010/07/27 at 4:39 pm

I totally had to Google “OPM” to figure out what you were talking about. Gosh, I must be a newbie. Other than saying “I’m investing in friendship” when I spend money to hang out with friends, and it’s never something I can’t afford. But OPM does give me drive to be successful so I can do things that tend to cost more money.

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Kevin@OutOfYourRut 2010/07/28 at 5:18 am

Jenna – that’s a side of OPM (Other People’s Money) that I hadn’t considered! But if your using your own money for activities with friends then you aren’t using OPM.

OPM was a term that started out with investing, mostly real estate. The concept was that you used “other people’s money”, aka debt, to borrow to buy as much real estate as you could buy, then sell at a huge profit later. The more OPM you could get, the less of your own money you had to have in the game.

The problem is that OPM started moving away from leveraged investing and more into raw speculation and even eventually into consumption. Any time a mantra isn’t challenged it becomes a problem.

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Jenna 2010/07/28 at 2:23 pm

Does OPM apply to families or just friends and business partners?

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Kevin 2010/07/28 at 6:27 pm

Generally it refers to using anyone’s money but yours, and that includes family, friends and business partners, but also creditors of any sort.

James 2010/07/28 at 10:39 am

i have definitely bought items that were scary or i knew were expensive but in regards to items i couldn’t afford. i would rather miss an opportunity to buy something cool than go into debt.

the way i look at it, swallow your pride and move on. if you can’t afford it then don’t buy it. period

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Kevin 2010/07/28 at 11:24 am

James – Not wanting to admit we can’t afford something is so wrenching to the ego that it often causes us to buy what we can’t afford. I think that’s at the root of most debt problems.

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Budgeting in the Fun Stuff 2010/07/28 at 1:14 pm

I think that the acceptance of debt has gotten people into trouble, but they still made the choice. My husband and I have never taken on more than we can EASILY afford. Even our house was “only” $114,000, so it was a $91,200 mortgage for 15 years at 5.375%. That’s $740 a month plus an extra $250 a month for property taxes and homeowner’s insurance since we don’t escrow. Even on my income, we could afford to live (barely…I bring home about $26,000 a year).

My point is that we could have bought a $250,000 house, but we chose not to for the security that having padding offers. We are not geniuses…we simply knew that a $740 payments would be a lot less stressful than a $2100 payments. I just think that people justify so much to themselves when it comes to their wants. It’s a sense of entitlement that you either have, don’t have, or are working to break…

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Kevin 2010/07/28 at 6:39 pm

Wow, good for you, living beneath your means. That’s really the key to good money management (and what OPM has really gotten in the way of).

The really good thing you did with the purchase of the house was preserving your options. If the house you buy enables you live on one paycheck you effectively insulated yourselves from most hardships.

Most people do the opposite; they view the home purchase as so supreme that they pre-bankrupt themselves and when a crisis hits it hits hard. There’s no margin for error. I think that explains many of the foreclosures in recent years.

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jenny 2010/07/29 at 6:01 am

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cashadvance1 2010/07/29 at 7:44 am

the new gold rush

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Payday Loans 2010/07/29 at 11:15 am

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Nice feedback from the readers as well!
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cashadvance1.co.uk 2010/07/30 at 8:24 am

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opm 2010/09/06 at 10:46 am

opm – Our Personal money

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Fleet Insurance 4U 2011/04/25 at 10:47 pm

Great article there, thanks for sharing. An issue may be that it is just too easy people to get hold of credit these days, regardless of their past credit history. A long time ago, I assume that most people just spent what they earn’t and led a much less stressful life than the average man/woman of today. Unfortunately, people don’t usually realise they have to fix their debts until it completly spirals out of control.:)

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Kevin 2011/04/26 at 6:40 am

That sounds like back in the “good old days”! Easy credit is the grease on the wheels, but I think the real driver might be TV. TV makes everything look easy–what ever anyone wants they have, and the viewer is never clued in on how they pay for it.

That seems to be creating a neverland attitude, weakening good sense that might prevent people from living beyond their means. When you add credit to the hypnotic lure of TV you get what we’ve got, a world where millions of people are hopelessly in debt with a bunch of good stuff in tow.

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Chuck 2012/09/20 at 2:54 am

You have presented your opinion. There is nothing “wrong’ about your opinion.

However it certainly is Not the way to create wealth. To create wealth by and large requires risk. Risk includes using everything you advocate against above like going into debt.

You could live a life without doing that but you will not have sufficient dream like growth (*) so the above is your belief, your truth; not the truth: as in many will and need to take that risk to get ahead and indeed go into debt. It is hoped they go into wise debt: buying assets, having risk management strategies in place (but that is no guarantee against debt).

*: in the past I would have stated that for a person avoiding risk, they could work hard, earn, put their money into a long term account with high interest but even that is not without risk as the financial crisis has shown us. So whereas I like this, it is Not the only way forward.

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